By G C Mays
When the USDA released its initial 2012/13 estimates for the U.S. and global wheat crop the agency said it expects higher wheat production in the US, offset by lower production around the world and resulting in lower global ending stocks. Initial estimates are provisional and subject to significant revisions because spring planting remains a work-in-progress in the Northern Hemisphere and is many months away below the equator. Provisional or not, these estimates combined with renewed instability in Europe has roiled fertilizer stocks Mosaic (MOS), Potash Corp (POT), Agrium (AGU), and CF Industries (CF).
Estimated wheat production in the U.S. for 2012/13 is at 61.1 million tons, which is 12 percent higher than last year. Improved yields due to recovery from the severe drought conditions of 2011 are the primary reason for the increase. Estimates of global wheat production are 2.5 percent lower than 2011 at 677.6 million metric tons. Wheat production in the European Union or EU-27, which is the largest wheat producer in the world, may decline by -5.4 million metric tons to a 5-year low of 132 million.
Source: The Mays Report
Unfortunate winter weather will likely reduce the winter wheat harvest area as well as yields in the EU-27.
The former Soviet Union or FSU-12 is forecasting wheat production of 97.8 million tons, a -16.7 million ton reduction from last year. Roughly half of this loss comes from the Ukraine, where dry conditions in the fall reduced yields. The spring has been dry as well and could further reduce yields. Here are the changes in production for select countries and / or regions.
Source: The Mays Report
South American wheat, at only 3 percent of total production is not nearly as important to global supplies as its corn and soybeans are. However, due to the governments restrictive export policies farmers are turning from wheat to barley.
At 686.5 million metric tons, global use is down by just a little over 1 percent. Part of the reason for the decline is lower projected feed use as many switch to corn due to relatively lower prices and less availability of low quality wheat in the Black Sea, EU-27, and Australia. This is in direct contrast to the US, where because of high old-crop corn prices, wheat feed and residual use may increase by 50 million bushels despite a higher quality wheat crop.
Estimates of U.S. ending stocks are lower than last year despite higher production, this is due to higher domestic demand and exports. Global ending stocks are also expected to decline to their lowest levels since the 2008/09 marketing year. It is very important that investors note that initial estimates of ending wheat stocks are far more volatile than initial production estimates. Therefore, investors should expect a great deal of volatility over the next few months as the USDA receives more data and refines their estimates.
Lower ending stocks are generally bullish for crop prices and by extension, the stocks of fertilizer companies. However, just five months ago wheat ending stocks were at all-time highs. It may take extra time to work off more of that inventory. As the European debt crises comes to a close, I expect fertilizer stock prices to stabilize as dealers finally begin to add to their fertilizer bins. Risks include heightened problems in Europe that persist as well as weakening domestic economic prospects should they develop.